Irving Wladawsky-Berger

Money Doesn't Necessarily Buy Competitive Advantage

Just about every company will tell you that innovation is one of its highest priorities.  How can you tell if the company truly means it, or if it's mostly wishful thinking or marketing hype?  We can see if the company is putting its money where its mouth is by measuring how much it spends on innovation relative to other companies in its industry.  But, this is much easier said than done.  There is no consensus as to which budget line items to include in measuring innovation spending.  So, as often happens, people will try to use a well defined, concrete line item as a proxy for estimating the measurement they are really after.

Research and development is often used as such a proxy for innovation.  Many assume that since both R&D and innovation are supposed to translate into competitive advantage, looking at how much companies spend on R&D equates to how serious they are about innovation.  But, as Michael Schrage, a Research Fellow in MIT’s Center for Digital Business wrote in an FT article in November of 2005:

“Any policymaker, chief executive or innovation champion who relies on R&D intensity and R&D budgets as a meaningful or usable metric to assess global competitiveness virtually guarantees shoddy analysis and distorted decisions.  Few things reveal less about a company's ability to innovate cost-effectively than its R&D budget.  Just ask General Motors.  No company in the world has spent more on R&D over the past 25 years.  Yet, somehow, GM's market share has declined.”

“The simple fact,” he later added, “is that R&D spending - whether in euros, dollars or as a percentage of sales - is an input, not a measure of efficiency, effectiveness or productivity.  Ingenuity, invention and innovation are rarely functions of budgetary investment.”

The New Entrepreneurship: Back to the Roots of the American Dream

The latest figures from the Bureau of Labor Statistics show that the US unemployment rate continues to hover around 9%.  Gallup’s measurements are somewhat higher at 9.2%.  When you add to the unemployment rate the percentage of Americans working part time but wanting full time work, you get an underemployment rate of 19.1%. 

The current period of high unemployment is the longest since the Great Depression.  There have been a number of ups and downs in the economy over the past sixty years.  But while unemployment went up during the down periods, within a relatively short time, the economy improved and the unemployment rates started to go down once, usually below 5%. 

Our current downturn seems fundamentally different from the recessions of past decades.  The continuing high rate of unemployment may well be due to a fundamental restructuring of society as we transition from the industrial economy of the past couple of centuries to an information-based economy.  As a result, many of the jobs lost in the downturn are not coming back as we have known them.

While the overall economy has started to recover, we are actually in a fairly unique situation: a jobless recovery.  Business conditions have significantly improved in the US while unemployment remains high.

Reflections of the Evolution of Capitalism

The Cold War was an era of military, political and economic conflicts between the communist world led by the Soviet Union, and the Western world, led by the US.  The two sides were also engaged in fierce debates about the merits of their key political and economic philosophies:  the communism and one-party states of the countries in the Soviet camp, versus the democracies, capitalism and market economies of the West.  These debates were settled by 1991 with the collapse and dissolution of the Soviet Union.

China, Vietnam and other countries have one-party political systems ruled by their communist parties, but in the last couple of decades they have also embraced market economies.  Their economic systems look more like a kind of state capitalism, with the government behaving like one giant corporation, than anything resembling Soviet style communism.  For all practical purposes, only Cuba and North Korea have remained faithful to the highly centralized style of communism once practiced in the Soviet Union.  The sorry state of their economies speaks for itself.

Given that most countries around the world now have economies based on some form or another of capitalism and open markets, you would expect that the passionate ideological debates of the past are over.  Not so.  The economic debates in the US and many other countries are actually fiercer than ever, but they are taking place within the broad framework of capitalism.  Capitalism continues to evolve, and different people have their own ideas about how that should happen. 

There are many lenses through which to view the evolution of capitalism.  Let me offer my reflections on the topic through a few such lenses.

The Management of Disruptive Innovations

The management of disruptive innovations is very different when looking at relatively simple or self-contained technologies, products or services versus highly complex platforms and infrastructures.  A lot of the hype you often hear when new innovations come about is the result of people not properly understanding the different dynamics that apply to simple versus highly complex innovations.  Unrealistic predictions are then made about the near term impact and rate of adoption of the new innovation, because the innovation in question is quite complex in nature, but the predictions assumes that it is on the simpler end of the spectrum. 

Let me illustrate what I mean by giving a few examples of different kinds of disruptive innovation across the spectrum from relatively simple to highly complex.

Reflections on the Transition to an Information Society

In the 1920s, Russian economist Nikolai Kondratiev observed that capitalist economies go through long term cycles of booms and depressions every 50 years or so.  These economic cycles became known as Kondratiev Waves.  More recently, Carlota Perez expanded on Kondratiev’s work, describing the central role of technological revolutions, disruptive innovations, and financial and production capital in these economic cycles.

Perez identified five such technology-based revolutions and economic cycles since the onset of the Industrial Revolution in 1771, the first one being the age of machines, factories and canals.  This was followed by the age of steam and coal, iron and railways starting in 1829; steel, electricity and heavy engineering in 1875; the age of oil, the automobile, and mass production in 1908; and our present age of digital technologies, information and telecommunications which Perez pegs as starting in 1971.

In each of these cycles, unrealistic expectations in the new disruptive technologies led to over-investments in new companies.  This eventually turned into unsustainable speculation, causing a financial bubble, which eventually crashed and resulted in a period of economic stagnation. 

In the past four cycles, once the impact of the financial bubble and economic stagnation worked themselves out, a golden age of innovation and production followed, where new paradigms based on the new technologies significantly transformed the economy and just about every single industry, as well as re-shaping the institutions of society, and the nature of work, government and even people’s personal lives.

But now,  given our jobless recovery and continuing slow growing economy in the US, we are pondering whether we are once more at the onset of a new golden age of innovation, or at the beginning of something different which will become known as The Great Stagnation.  While I am hopeful that technology, innovation and globalization will eventually lead to all kinds of new jobs, a much improved economy and a higher standard of living, none of us really knows which of these two scenarios will prevail in the future.